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As the term suggests, for-profit companies are driven primarily by one goal — to maximize profits for their owners. Nonprofits, on the other hand, are generally motivated by a charitable purpose. Here’s how their respective financial statements reflect this difference.

Reporting revenues and expenses

For-profits produce an income statement (also known as a profit and loss statement), listing their revenues, gains, expenses and losses to evaluate financial performance. They report mainly on profitability and increasing assets, which correlate with future dividends and return on investment to owners and shareholders.

By comparison, not-for-profit entities just want revenue to cover the costs of fulfilling their mission now and in the future. They often rely on grants and donations in addition to fees for service income. So they prepare a statement of activities, which lists all revenue less expenses, and classifies the impact on each net asset class.

Many nonprofits currently produce a statement of functional expenses. But a new accounting standard kicks in this year — Accounting Standards Update (ASU) No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. It will require organizations to classify expenses by nature (meaning categories such as salaries and wages, rent, employee benefits and utilities) and function (mainly program services and supporting activities). This information will need to be expressed in a grid format that shows the amount of each natural category spent on each function.

Balance sheet considerations

For-profit companies prepare a balance sheet that lists the owner’s or shareholders’ equity, which is based on the company’s assets, liabilities and prior profits. The equity determines the value of a company’s common and preferred stock.

Nonprofits, which have no owners, prepare a statement of financial position. It also looks at assets, liabilities and prior earnings. The resulting net assets historically have been classified as 1) unrestricted, 2) temporarily restricted, or 3) permanently restricted, based on the presence of donor restrictions. Starting in 2018 for most not-for-profits, the new accounting standard will reduce these classes to two: 1) net assets without donor restrictions and 2) net assets with donor restrictions.

Footnote disclosures

Another key difference: Nonprofits tend to focus more on transparency than for-profit businesses do. Thus, their financial statements and footnotes include a lot of disclosures, such as about the nature and amount of donor-imposed restrictions on net assets. Starting in 2018, ASU No. 2016-14 will require more disclosures on the amount, purpose and type of board designations of net assets. Additional disclosures will be required to outline the availability and liquidity of assets to cover operations in the coming year.

Common denominator

Whether operating for a profit or not, all entities have a common need to produce timely financial statements that stakeholders can trust. Contact us for help reporting accurate financial results for your organization.

Are you a high-income small-business owner who doesn’t currently have a tax-advantaged retirement plan set up for yourself? A Simplified Employee Pension (SEP) may be just what you need, and now may be a great time to establish one. A SEP has high contribution limits and is simple to set up. Best of all, there’s still time to establish a SEP for 2017 and make contributions to it that you can deduct on your 2017 income tax return.

2018 deadlines for 2017

A SEP can be set up as late as the due date (including extensions) of your income tax return for the tax year for which the SEP is to first apply. That means you can establish a SEP for 2017 in 2018 as long as you do it before your 2017 return filing deadline. You have until the same deadline to make 2017 contributions and still claim a potentially hefty deduction on your 2017 return.

Generally, other types of retirement plans would have to have been established by December 31, 2017, in order for 2017 contributions to be made (though many of these plans do allow 2017 contributions to be made in 2018).

High contribution limits

Contributions to SEPs are discretionary. You can decide how much to contribute each year. But be aware that, if your business has employees other than yourself: 1) Contributions must be made for all eligible employees using the same percentage of compensation as for yourself, and 2) employee accounts are immediately 100% vested. The contributions go into SEP-IRAs established for each eligible employee.

For 2017, the maximum contribution that can be made to a SEP-IRA is 25% of compensation (or 20% of self-employed income net of the self-employment tax deduction) of up to $270,000, subject to a contribution cap of $54,000. (The 2018 limits are $275,000 and $55,000, respectively.)

Simple to set up

A SEP is established by completing and signing the very simple Form 5305-SEP (“Simplified Employee Pension — Individual Retirement Accounts Contribution Agreement”). Form 5305-SEP is not filed with the IRS, but it should be maintained as part of the business’s permanent tax records. A copy of Form 5305-SEP must be given to each employee covered by the SEP, along with a disclosure statement.

Additional rules and limits do apply to SEPs, but they’re generally much less onerous than those for other retirement plans. Contact us to learn more about SEPs and how they might reduce your tax bill for 2017 and beyond.

With bonus depreciation, a business can recover the costs of depreciable property more quickly by claiming additional first-year depreciation for qualified assets. The Tax Cuts and Jobs Act (TCJA), signed into law in December, enhances bonus depreciation.

Typically, taking this break is beneficial. But in certain situations, your business might save more tax long-term by skipping it. That said, claiming bonus depreciation on your 2017 tax return may be particularly beneficial.

Pre- and post-TCJA

Before TCJA, bonus depreciation was 50% and qualified property included new tangible property with a recovery period of 20 years or less (such as office furniture and equipment), off-the-shelf computer software, water utility property and qualified improvement property.

The TCJA significantly expands bonus depreciation: For qualified property placed in service between September 28, 2017, and December 31, 2022 (or by December 31, 2023, for certain property with longer production periods), the first-year bonus depreciation percentage increases to 100%. In addition, the 100% deduction is allowed for not just new but also used qualifying property.

But be aware that, under the TCJA, beginning in 2018 certain types of businesses may no longer be eligible for bonus depreciation. Examples include real estate businesses and auto dealerships, depending on the specific circumstances.

A good tax strategy • or not?

Generally, if you’re eligible for bonus depreciation and you expect to be in the same or a lower tax bracket in future years, taking bonus depreciation is likely a good tax strategy (though you should also factor in available Section 179 expensing). It will defer tax, which generally is beneficial.

On the other hand, if your business is growing and you expect to be in a higher tax bracket in the near future, you may be better off forgoing bonus depreciation. Why? Even though you’ll pay more tax this year, you’ll preserve larger depreciation deductions on the property for future years, when they may be more powerful — deductions save more tax when you’re paying a higher tax rate.

What to do on your 2017 return

The greater tax-saving power of deductions when rates are higher is why 2017 may be a particularly good year to take bonus depreciation. As you’re probably aware, the TCJA permanently replaces the graduated corporate tax rates of 15% to 35% with a flat corporate rate of 21% beginning with the 2018 tax year. It also reduces most individual rates, which benefits owners of pass-through entities such as S corporations, partnerships and, typically, limited liability companies, for tax years beginning in 2018 through 2025.

If your rate will be lower in 2018, there’s a greater likelihood that taking bonus depreciation for 2017 would save you more tax than taking all of your deduction under normal depreciation schedules over a period of years, especially if the asset meets the deadlines for 100% bonus depreciation.

If you’re unsure whether you should take bonus depreciation on your 2017 return — or you have questions about other depreciation-related breaks, such as Sec. 179 expensing — contact us.

Tax credits reduce tax liability dollar-for-dollar, potentially making them more valuable than deductions, which reduce only the amount of income subject to tax. Maximizing available credits is especially important now that the Tax Cuts and Jobs Act has reduced or eliminated some tax breaks for businesses. Two still-available tax credits are especially for small businesses that provide certain employee benefits.

1. Credit for paying health care coverage premiums

The Affordable Care Act (ACA) offers a credit to certain small employers that provide employees with health coverage. Despite various congressional attempts to repeal the ACA in 2017, nearly all of its provisions remain intact, including this potentially valuable tax credit.

The maximum credit is 50% of group health coverage premiums paid by the employer, if it contributes at least 50% of the total premium or of a benchmark premium. For 2017, the full credit is available for employers with 10 or fewer full-time equivalent employees (FTEs) and average annual wages of $26,200 or less per employee. Partial credits are available on a sliding scale to businesses with fewer than 25 FTEs and average annual wages of less than $52,400.

The credit can be claimed for only two years, and they must be consecutive. (Credits claimed before 2014 don’t count, however.) If you meet the eligibility requirements but have been waiting to claim the credit until a future year when you think it might provide more savings, claiming the credit for 2017 may be a good idea. Why? It’s possible the credit will go away in the future if lawmakers in Washington continue to try to repeal or replace the ACA.

At this point, most likely any ACA repeal or replacement wouldn’t go into effect until 2019 (or possibly later). So if you claim the credit for 2017, you may also be able to claim it on your 2018 return next year (provided you again meet the eligibility requirements). That way, you could take full advantage of the credit while it’s available.

2. Credit for starting a retirement plan

Small employers (generally those with 100 or fewer employees) that create a retirement plan may be eligible for a $500 credit per year for three years. The credit is limited to 50% of qualified start-up costs.

Of course, you generally can deduct contributions you make to your employees’ accounts under the plan. And your employees enjoy the benefit of tax-advantaged retirement saving.

If you didn’t create a retirement plan in 2017, you might still have time to do so. Simplified Employee Pensions (SEPs) can be set up as late as the due date of your tax return, including extensions. If you’d like to set up a different type of plan, consider doing so for 2018 so you can potentially take advantage of the retirement plan credit (and other tax benefits) when you file your 2018 return next year.

Determining eligibility

Keep in mind that additional rules and limits apply to these tax credits. We’d be happy to help you determine whether you’re eligible for these or other credits on your 2017 return and also plan for credits you might be able to claim on your 2018 return if you take appropriate actions this year.

Along with tax rate reductions and a new deduction for pass-through qualified business income, the new tax law brings the reduction or elimination of tax deductions for certain business expenses. Two expense areas where the Tax Cuts and Jobs Act (TCJA) changes the rules — and not to businesses’ benefit — are meals/entertainment and transportation. In effect, the reduced tax benefits will mean these expenses are more costly to a business’s bottom line.

Meals and entertainment

Prior to the TCJA, taxpayers generally could deduct 50% of expenses for business-related meals and entertainment. Meals provided to an employee for the convenience of the employer on the employer’s business premises were 100% deductible by the employer and tax-free to the recipient employee.

Under the new law, for amounts paid or incurred after December 31, 2017, deductions for business-related entertainment expenses are disallowed.

Meal expenses incurred while traveling on business are still 50% deductible, but the 50% limit now also applies to meals provided via an on-premises cafeteria or otherwise on the employer’s premises for the convenience of the employer. After 2025, the cost of meals provided through an on-premises cafeteria or otherwise on the employer’s premises will no longer be deductible.

Transportation

The TCJA disallows employer deductions for the cost of providing commuting transportation to an employee (such as hiring a car service), unless the transportation is necessary for the employee’s safety.

The new law also eliminates employer deductions for the cost of providing qualified employee transportation fringe benefits. Examples include parking allowances, mass transit passes and van pooling. These benefits are, however, still tax-free to recipient employees.

Transportation expenses for employee work-related travel away from home are still deductible (and tax-free to the employee), as long as they otherwise qualify for such tax treatment. (Note that, for 2018 through 2025, employees can’t deduct unreimbursed employee business expenses, such as travel expenses, as a miscellaneous itemized deduction.)

Assessing the impact

The TCJA’s changes to deductions for meals, entertainment and transportation expenses may affect your business’s budget. Depending on how much you typically spend on such expenses, you may want to consider changing some of your policies and/or benefits offerings in these areas. We’d be pleased to help you assess the impact on your business.

I wanted to give you a heads up in the case you had not already seen this that the new tax law has a hidden issue related to M&A. Since it is so new there is no Code section to refer to, but Paragraph 1504 of the new law adds to the list of assets that are excluded from the definition of capital assets.

Prior law excluded copyrights, literary, musical, or artistic compositions, letters or memoranda, or similar property from the definition of a capital asset if the asset is held either by the taxpayer who created the property, or a taxpayer for whom the property was produced. Seldom in M&A do we see these assets being transferred. The new law however changes this considerably. The new law adds to this list patents, inventions, model or design, and a secret formula or process which is held by the taxpayer who created the property (or for whom the property was created).

The added items are encountered many time in the sale of a business. The problem is that these items are intangibles and the value of these items have, historically been included in the portion of the purchase price that is allocated to goodwill. Goodwill is a capital asset, and therefore subject to capital gains tax, whereas the previously mentioned items are not capital assets if the sale occurs in 2018 or later and must be excluded from goodwill value. This give us an opportunity and creates some danger. The opportunity is now we have another category of purchase price we can negotiate, the danger is if we do not separately state the allocation to these assets and they accidentally end up in the goodwill allocation the IRS could, upon audit make a sizable adjustment for the portion of the goodwill that they deem to be the value of these excluded items. Fair Market Value in a sale between unrelated parties is whatever they agree upon. If they do not agree then the IRS will have the ability to create a value. In most cases the value of a business in excess of the value of its tangible personal or real property is considered “goodwill”. This represents the value of the cash flow in excess of the tangible asset value. If the business makes its money from the production of a product that has a patent or uses a secret formula then much of this excess value may actually be attributable to the patent or secret formula, which would render that portion of the purchase price subject to ordinary income tax rates and not be treated as capital gains. If the value of these excluded assets are separately stated and the value is agreed to in the purchase agreement the IRS would have a hard time adjusting it.

The bottom line is if the business possesses any of the excluded assets it would be wise to allocate a negotiated portion of the purchase price to this class of assets.

The Disaster Tax Relief and Airport and Airway Extension Act of 2017 was signed into law on September 28, 2017 (hereafter referred to as The Disaster Tax Relief Act). The legislation provides tax relief to the victims of Hurricanes Harvey, Irma and Maria and funds the Federal Aviation Administration through March 2018.

Although this new law affects individuals and employers, the purpose of this paper is to advise tax exempt organizations concerning one specific area of the new law relating to issuance of charitable contribution acknowledgement letters. The law added a temporary suspension of the adjusted gross income (AGI) limitations that are imposed on qualified charitable contributions. The taxpayer must make an election for the temporary suspension of the AGI limitations to apply.

In general, the law prior to the September 28, 2017 legislation provides that individual’s cash contributions are deductible in any one year up to 50% of AGI and noncash contributions are deductible in any one year up to either 20% or 30% of AGI. Contributions limited by AGI are carried forward to subsequent years for up to five years.

A qualified charitable contribution under the new law is a contribution that was paid during the period beginning August 23, 2017 and ending on December 31, 2017, in cash to an organization described in section 170(b)(1)(A), for relief efforts in the Hurricane Harvey, Irma, or Maria disaster areas. The contribution must be substantiated with a contemporaneous written acknowledgement from the charitable organization that states that the contribution was or is to be used for relief efforts.

Most charitable organizations are aware of Internal Revenue Code (IRC) Section 170(f)(8)(A), which requires that the organization must provide the donor with a written acknowledgement of the donor contribution if the contribution was for $250 or more. IRC Section 6115 requires the charitable organization to provide the donor with a written statement if a contribution is made for $75 or more if part of the contribution is for goods or services (quid pro quo) and the statement must contain a good-faith estimate of the value of goods and services that the charity has provided to the donor. What charitable organizations may not know is that The Disaster Tax Relief Act requires written acknowledgement that not only states that the contribution was or is to be used for relief efforts but also requires a letter to the donor regardless of the size of the contribution.

In summary, charitable organizations that collected funds that were collected during 2017 and used in the relief efforts in the Hurricane Harvey, Irma or Maria disaster areas will want to start working on their acknowledgement letters for 2017 early in 2018 since all qualified relief contributions require an acknowledgement letter.

Note: Regulations may subsequently be issued that affect this provision of the tax law. Check with your tax advisor to determine whether any subsequent tax law changes are made. This paper is not intended to address all the provisions of The Disaster Relief Act but only the provision relating to the issuance of written acknowledgements.

Auditors assess their clients’ risk factors when planning for next year’s financial statement audit. Likewise, proactive managers assess risks at year end. A so-called “SWOT” analysis can help frame that assessment.

Typically presented as a matrix, this analysis of strengths, weaknesses, opportunities and threats provides a logical framework for understanding how a business runs. It tells what you’re doing right (and wrong) and predicts what outside forces could impact cash flow in a positive (or negative) manner.

Internal factors

SWOT analysis starts by identifying strengths and weaknesses from the customer’s perspective. Strengths represent potential areas for boosting revenues and building value, including core competencies or competitive advantages. Examples might include a strong brand image, a loyal customer base or exceptional customer service.

It’s important to unearth the source of each strength. When strengths are largely tied to people, rather than the business itself, consider what might happen if a key person suddenly left the business. To offset key person risks, consider:

Purchasing life insurance policies on key people,

Initiating noncompete or buy-sell agreements, or

Implementing a formal succession plan designed to transition management to the next generation.

Weaknesses represent potential risks and should be minimized or eliminated. They might include high employee turnover, weak internal controls, unreliable quality or a location with poor accessibility. Often weaknesses are evaluated relative to the company’s competitors.

Outside influences

The next part of a SWOT analysis looks externally at what’s happening in the industry, economy and regulatory environment. Opportunities are favorable external conditions that could increase revenues and value if the company acts on them before its competitors do.

Threats are unfavorable conditions that might prevent your company from achieving its goals. Threats might come from the economy, technological changes, competition and increased regulation. The idea is to watch for and minimize existing and potential threats.

Need help?

Contact us for help putting your company’s risk framework together. We can guide you on how to use SWOT analysis to evaluate 2017 financial results and plan for the future.

The holidays are approaching and with the spirit of giving all around you may be inspired to donate to a local charity. Charitable giving makes you feel good, and bonus-you can save on your tax liablity! There are several ways to donate to a charitable organization which can help those in need or to further a cause you are passionate about. You can donate good old fashion cash or non-cash items such as food, clothing, toys, as well as donations of stock and vehicles. When donating non-cash items, the deductible value is the fair market value of the item-generally the value at which the item would be exchanged between a willing buyer and a willing seller where both have reasonable knowledge of all the relevant facts. Best practice is to document the donation either with bank records, written acknowledgement from the organization, or a telephone bill if donating by text. If you donate similar non-cash items valued at more than $5,000, generally, you will need a qualified appraisal in order to claim a deduction. When donating a vehicle, the organization should issue you a Form 1098-C.

Although purchasing raffle tickets from an organization is helping the organization raise money, the cost of the raffle ticket is not considered a charitable contribution to the buyer, but rather a ticket purchase to gamble. You do not receive a deduction for buying charitable raffle tickets. However, donating items to an organization for a raffle or an auction is considered a non-cash donation to the extent of its fair market value. If you purchase an item from an auction that the organization is holding then the charitable contribution is the amount that is in excess of the fair market value of the item purchased. Generally, you will want to obtain a written acknowledgement letter from the organization stating the fair market value along with the amount paid for the item purchased at the auction.

In order to receive a tax benefit you must file Form 1040 and itemize using Schedule A instead of using the standard deduction. This means your personal expenses such as medical, real estate and sales tax, mortgage interest, charitable contributions, and other qualified personal deductible expenses are greater than the standard deduction.

Be sure that your charitable donation is to a qualified 501(c)(3) organization. If you do not know, usually the organization’s website or acknowledgement letter will inform you of the type of non-profit organization. You can also check the IRS website to confirm.

Partnerships and many LLCs file partnership income tax returns. As a result of the Bipartisan Budget Act of 2015 (“BBA”), the IRS has new audit rules for entities that file partnership income tax returns beginning January 1, 2018. These audit rules significantly change the regime that currently governs partnership tax audits, assessments and collections.

The condensed version of the changes is, in the past when a partnership was audited, the IRS pushed the adjustments through to the partners of the partnership who were partners in the year under audit. The new rules allow the IRS to charge the tax, due to audit adjustments, directly to the partnership and the current partners.

Your first thought may be, why could this be a problem? Well, let’s assume you bought into a partnership in 2017, and shortly thereafter the partnership is audited by the IRS for 2015 and there is an adjustment that causes there to be more taxes paid. Under the new rules you would likely be paying the tax for the partners that were owners in 2015.

To solve this problem, you can make changes to your partnership or LLC member agreement. Partnerships with 100 or fewer partners that meet certain other requirements may be eligible to elect to opt out of these rules. For partnerships or LLCs that qualify for this “opt out”, the partnership agreements could be modified to make the “opt out” mandatory.

Another change with the BBA is the term of “Tax Matters Partner” is eliminated. The new term is “Partnership Representative”. The partnership or LLC agreement could be changed to reflect how the Partnership Representative will be selected, removed or replaced. You may also consider limiting the Partnership Representative’s authority over certain tax matters, such as extending a statute of limitations or settling the dispute.

There is also a new election labeled the “Push Out Election”. As it sounds this allows the partnership or LLC to push out any audit adjustments to prior year partners. This election is not automatic and must be elected within 45 days of receiving the final notice of partnership adjustment. The requirement to make this election can be documented in the partnership or LLC agreement.

The IRS has put us on notice that we can expect to see more partnership and LLC audits than in the past. Consulting your advisors about the issues raised in the BBA will leave you prepared for any audit in which your partnership may be involved.